SMSF borrowing is 'thriving', but why the sudden popularity?

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on March 15, 2022 Fact Checked
SMSF borrowing is 'thriving', but why the sudden popularity?

The value of SMSF loans has increased by about 50% in four years, up from $41 billion in 2017 to $65.8 billion in 2021.

Over the December quarter, the value of limited-recourse borrowing arrangements (LRBAs) increased by almost $3 billion to $65.8 billion according to the ATO.

The latest figures revealed that the value of property held within self-managed super funds (SMSFs) rose to a record $140 billion.

Specifically, the value of non-residential property rose by $4 billion to $91.5 billion, and the value of residential property rose by around $2 billion to $48.9 billion.

Chartered accountant Dr Adrian Raftery, also known as 'Mr Taxman', said there are many reasons for this, but that the super industry has grown substantially in general.

"All SMSFs across Australia have increased total assets by almost $200 billion since December 2017, so it is not unexpected to see an increase in property investments as well as LRBA borrowings," Dr Raftery told Savings.com.au.

"Even in down times, the super pool will still go up by the 10% employer contributions being made in every pay run across the country."

According to Dr Raftery, super is now the largest asset in many households other than the family home.

"Many SMSF trustees get spooked by the stock market yet are comfortable with property; more particularly, they are extremely relaxed with the concept of borrowing money in order to help fund a property purchase," Dr Raftery said.

"Whilst the $66 billion LRBA figure does look substantial, it should be pointed out that it represents just 46% of property held in SMSFs - $141 billion - and only 7.5% of total assets held in SMSF - $876 billion – rather small when compared to the owner-occupier housing market."

This means that 54% of properties within SMSFs are not tied to an LRBA.

James Austin, Chief Financial Officer at Firstmac, said investing in residential real estate through an SMSF is popular for a few reasons.

"Investment of superannuation funds into residential real estate is increasingly popular given the relative stability of housing prices, and the tax advantages associated with superannuation," Mr Austin told Savings.com.au.

What could this mean for the housing market?

Dr Raftery said there are two great fears of LRBAs.

"[The first fear] is not so much the overall total value in dollar terms rising, but the actual loan-to-value ratio (LVR) rising too much [to the point where] an SMSF needs to liquidate an asset in a panic, [which could create] a secondary effect on the stability of the housing market," he said.

However, he said this should not be an issue, as borrowing levels are 50% or less of the property's value.

"Secondly, there is a fear that SMSFs are pricing out young Australians from owning their own home," Dr Raftery said.

"Although there is $48 billion invested by SMSFs in residential property, this is quite low compared to the overall Australian property market and it should be noted that the growth rate in the past four years for this sector is a lot lower than other SMSF asset classes."

Overall, SMSFs mainly dabble in commercial real estate, representing two thirds of the total SMSF property investment portfolio.

"I see this is a positive sign that small businesses - by some considered the heartbeat of the Australian economy - is active, particularly across the local communities," Dr Raftery said.

"It would be more worrisome for the overall economy if non-residential property investment was declining.

"We are starting to see a shortage of commercial property stock in some places and, as a result, values have increased; clearly been a good investment for some SMSFs who bought in early before the boom."


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Lender

Variable
More details
SELF MANAGED SUPER FUND LOAN
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  • No application fee and no settlement fee
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SELF MANAGED SUPER FUND LOAN

SMSF 80

  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees
Variable
More details
  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

Ocean SMSF (No Offset) (Metro) (Principal and Interest) (LVR < 60%)

  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees
Variable
More details
  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

SMSF 70 (Refinance)

  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees
Variable
More details
  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

Liberty SuperCredit SMSF (LVR < 60%)

  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees
Variable
More details
  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

SMSF Residential

  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees
Variable
More details
  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

SMSF 70 (Purchase) (New Customer)

  • Easy refinance process
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 29, 2022. View disclaimer.


Image by City of Gold Coast on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Rachel is a Finance Journalist, and joined Savings in 2021. Coming from a background in the FinTech space, her interests include the innovation of lending technology, property, investing, and more. With a passion for educating and informing people about their finances, she hopes to increase the financial literacy of everyday Australians.

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